What’s in it for me:
- Why Mexico is an interesting market for fintech?
- Why Kueski is an interesting startup?
- How Kueski works?
Talking to many investors, I realise that more and more they are interested in what is happening in Latin America. In the last year, we have seemed a couple of great investment rounds in Latin America’s startups from top tier investors such as Sequoia Capital (Nubank in Brazil), Andreessen Horowitz (Rappi in Colombia), Accel Partners (Cornershop in Mexico), just to highlight a few. Here follows a Techcrunch post by Julie Ruvolo, explaining more details, article link.
This way, I decided to start analysing the best startups from Latin America so that people could understand better what’s happening in Latin American startup ecosystem.
For this post, I selected one of the hottest startups in the fintech, Kueski. Kueski is a Mexican startup that received US$ 35 MM round from which US$ 10 MM is an equity investment co-led by Richmond Global Venture, CrunchFund, and Variv Capital (source), and US$ 25 MM is a debt round.
First, let’s start talking about Mexico. Why Mexico is an interesting market for fintechs?
Here follow some important statistic about the country:
- GDP of US$ 1.063 trillion (15th largest economy by GDP, and the second in Latin America) (source);
- A population of 128.6 MM people, 10th largest population (source);
- Only 27% of the population older than 15 years is banked (source);
- 17.3MM credit card issued, less than 13.5% of the population has access (just for comparison, Brazil has 28% credit card penetration and US more than 40%) (source);
- Even with credit card, Mexicans prefer to pay in cash in 47% of the transactions while only 36% of the times with credit card (source);
- There are 44.2 MM smartphone users, a penetration of 34.4% (source);
- 69 MM users of internet, a 56% penetration (source);
- Basic interest rate is no 5.75% (source);
- Credit card average interest rate is 32% (source) and default rate of 5% (source);
- 56.6% of the population are informal workers, which correspond to 23.6% of Mexico’s GDP (source);
- Private sector credit is 32.7% of the GDP while in Brazil is 67.9%, and US is 188% (source);
This data show the huge potential for fintech startups in Mexico. It’s a big country where most people are still unbanked without access to credit cards, but that have access to internet and smartphones. The credit private sector is still small compared to other countries.
Fintechs can exploit these conditions to delivery financial services in new ways. And that’s exactly what they are doing, as Mexico became the most active fintech ecosystem in Latin America (source and more information).
Let’s talk about Kueski now. Kueski is a micro-loan startup from Guadalajara founded by Adalberto Flores and Leonardo de la Cerda in 2012.
Problem and Customer Segment
The problem Kueski is trying to solve is the Mexican population access to credit, especially for those that are unbanked. They decided to focus initially on the small and short personal loans.
How it work?
It’s quite easy; anyone can enter their website and request a loan.
Right now, they have a minimum limit of $1000 pesos (US$47.13) and a maximum of $2000 pesos (US$94.26) for the loans and also a limit of 30 days to pay.
After filling a form, they give you answer in 29 minutes regarding the loan request.
So, what exactly is their value proposition?
Money in developing economies is scarce, so it’s not as easy to get credit in Mexico as it is in the US, for example. Their value proposition is to give an easy and fast way to access credit to anyone, including the 73% of the population that is unbanked and doesn’t have access to this kind of financial services.
Quite an interesting value proposition, right?
But how works their business model works?
Kueski does the underwriting process and lends the money itself, charging an interest rate.
Since they use their own money to lend, makes a lot of sense the debt round of US$ 25MM they raised (credit line up to US$ 100MM – source). With that money, considering an average loan of $ 1500 pesos (US$ 70.70), they can borrow to more than 350,000 people, not considering taxes and reinvesting the money. That leaves them with a good working capital for the loans.
Their revenue model is an interest rate charged in principal of the loan. Due to the risk profile of this kind of investment, they charge a very high-interest rate, an average of 339.3% per year, which is quite high compared to the average interest rate of a credit card (32% per year). It’s important to remind that less than 13.5% of the population has access to a credit card.
Just making a rough calculation, with an average loan of $1500 pesos (US$ 70.70), even with a default rate of more than 60% they would still have a profit margin higher than 20%. Not bad, right? (I’m not considering tax and fees)
Although I don’t have data from their default rate, I would guess that it would not be so high since the default rate for credit card there is only 5%. Even though, Kueski has still two problems to deal with:
- They still don’t have a very good historical data to have a more probabilistic idea of their risk;
- They probably suffer an adverse selection because they will attract as customer people that couldn’t get loans with financial institutions with lower interest rate;
Due to the high-interest rate that they charge and the debt round they raised, I think they have enough room to overcome those challenges. Also, my guess is that their secret sauce is in the underwriting technology that they use.
I would love to understand better how they do it, but I couldn’t find much information about it. What I know is that they use social profiles as input for their underwriting process.
Another interesting side of their business model is how they make loans available for unbanked people. Since most of their clients (my guess) don’t have a bank account, they developed a partnership with a local Bancomer (local bank) and a chain of stores called OXXO, which is a convenient store that has more than 14,000 stores in the country.
Why is Kueski an interesting startup?
Mexico is a market where still most of the population don’t have access to credit. They are using technology and an innovative business model to untap a huge potential market. Also, as Kueski doesn’t have the pressure of banks as competition, this gives room for them to experiment and improve their underwriting process.
My guess is that they got the debt round and set the loan to a small amount to test as much as they can, this ways start to have some historical data and also to improve their underwriting process. It’s important to highlight that the underwriting process and the acquisition strategy are key to their business model to work.
After learning and improving the process, they will probably focus on higher amounts and more long-term loans using technology as a differential.
I don’t think they will try to compete directly with banks since their cost of capital is probably much higher, especially because there is still a huge market to explore.
What do you think? Would you invest in Kueski?
- Mexico is a hot market for fintech startups;
- Kueski is targeting a blue ocean market that doesn’t have many other options;
- Kueski underwriting process is probably what will make or break the company;
- There is still room in the market for Kueski to target larger and longer loans;